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Aditya Wahyu Setiawan 0849002 Adlin Fathar Siregar0849003 Frida Unsyiati0849023 Harris Hermawan 0849024 Wiryawan Kuncoro0850094 Enterprise Risk Management at ABN AMRO

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ERM Defined: A process, effected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives Source: COSO Enterprise Risk Management Integrated Framework. 2004. COSO.

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Why ERM Is Important Underlying principles: Every entity, whether for-profit or not, exists to realize value for its stakeholders. Value is created, preserved, or eroded by management decisions in all activities, from setting strategy to operating the enterprise day-to-day.

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Why ERM Is Important ERM supports value creation by enabling management to: Deal effectively with potential future events that create uncertainty. Respond in a manner that reduces the likelihood of downside outcomes and increases the upside.

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The ERM Framework Entity objectives can be viewed in the context of four categories: Strategic Operations Reporting Compliance

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The ERM Framework ERM considers activities at all levels of the organization: Enterprise-level Division or subsidiary Business unit processes

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The ERM Framework Enterprise risk management requires an entity to take a portfolio view of risk. Management considers how individual risks interrelate. Management develops a portfolio view from two perspectives: - Business unit level - Entity level

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The ERM Framework The eight components of the framework are interrelated

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ERM Roles & Responsibilities Management The board of directors Risk officers Internal auditors

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Key Implementation Factors 1. Organizational design of business 2. Establishing an ERM organization 3. Performing risk assessments 4. Determining overall risk appetite 5. Identifying risk responses 6. Communication of risk results 7. Monitoring 8. Oversight & periodic review by management

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DETERMINE RISK APPETITE Risk appetite is the amount of risk on a broad level an entity is willing to accept in pursuit of value. Use quantitative or qualitative terms (e.g. earnings at risk vs. reputation risk), and consider risk tolerance (range of acceptable variation).

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Impact vs. Probability PROBABILITY Low High IMPACTIMPACT Control ShareMitigate & Control Accept High Risk Medium Risk Low Risk High

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Example: Call Center Risk Assessment Credit risk Customer has a long wait Customer cant get through Customer cant get answers Low High IMPACTIMPACT PROBABILITY High Risk Medium Risk Low Risk Loss of phones Loss of computers Entry errors Equipment obsolescence Repeat calls for same problem Fraud Lost transactions Employee morale

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Overview ABN AMRO: Merger of Algemene Bank Nederland (ABN) and Amsterdam-Rotterdam Bank (AMRO) in 1991. ABN founded in 1824 AMRO: Merger of Amsterdam Bank and Rotterdam Bank in 1964. Subsidiaries: more 800 offices at home and another 2,600 in 75 other countries. ABN AMRO also had a large presence in Brazil and Malaysia. In 1995, ABN AMRO lost $124Million. In 1997, Close its diamond office. Ten Business Principles.

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Contd Has three major business segments: private clients and asset management, consumer and commercial clients, and wholesale clients. In 1998, ABN AMRO bought Brazils Banco Real and Bandepe Banks. In 1999, Acquisition BNG. ABN AMRO Key Result 2002 (Exhibit II). In 2000, ABN AMRO cut 150 branches. In 2001, ABN AMRO sold EAB to Citigroup.

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ABN AMRO: Key Results Exhibit: II (in millions) 2002 2001 Total revenues 18,280 18,834 Operating expenses 12,823 13,771 Operating result 5,457 5,063 Provisions 1,695 1,426 Value adjustments to financial fixed assets 49 24 Operating profit before taxes 3,713 3,613 Source: ABN AMRO Annual Report, 2002

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ABN AMRO: Risk Governance Organizational (EXHIBIT III)

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Risk Governance Establishing risk philosophy by Supervisory Board. Responsibility for overall impelemtation of risk policy lay with CFO. Risk was managed through 2 principal Departement: 1. GRM (Group Risk Management) 2. GALM (Group Assets and Liabilitity Management) GRM responsible for management of credit, country, market, and operational risks and (BASEL II). GALM attempted to protected the earnings and capital position of the bank from adverse interest rate and currency movements.

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Contd GRC's main responsibilities were to: Determine the risk policies, procedures and methodologies for measuring and monitoring risk Set delegated credit authorities for lower committees and authorized individuals within GRM, C&CC (Consumer and Commercial Clients) and PC&AM (Private Clients and Asset Management) Approve credit, market and operational risk associated with new products Approve risk transactions larger than the delegated authorities of lower committees Set the overall value-at-risk (VAR) for the bank's trading products globally Oversee the bank's overall portfolio for WCS, C&CC and PC&AM.

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The Purpose of Basel 1 In 1988, the Basel I Capital Accord was created. The general purpose was to: 1. Strengthen the stability of international banking system. 2. Set up a fair and a consistent international banking system in order to decrease competitive inequality among international banks. The basic achievement of Basel I has been to define bank capital and the so-called bank capital ratio. In order to set up a minimum risk-based capital adequacy applying to all banks and governments in the world, a general definition of capital was required.

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Basel Framework & Status January 2001, BCBS published Consultative Document reviewing the Basel Accord of 1988. 2002, BCBS delayed publication of New Capital Accord until its implementation in 2006. Oct 2002, BCBS launched Quantitative Impact Survey 3, ABN AMRO participated in the survey. ABN AMRO supported the increased risk-sensitive nature of the proposed New Capital Accord. The bank has set up a project group, Internal Rating Based basis for credit risk, and Advanced Measurement Approach for operational risk.

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Credit Risk All commercial activities required prior approval by authorized individuals or committees. The managing board delegate approval authority to GRM and further down to SBU. Decision authority was based on Global One Obligor Exposure, combined all direct and contingent credit limits. Uniform Counterparty Rating System, which was the risk rating of the individual counterparty. UCR was important for decision-making and portfolio management processes.

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The function of UCR Defining appropriate credit authority for approvals on a risk- based matrix and setting the frequency reviews. Identifying general trends in the quality of the banks credit portfolios and consequent adjustment to credit strategies. Generating key data for Risk Adjusted Return on Capital, economic capital and expected loss calculations. Rating tools were available for corporate clients worldwide, SME, project finance, banks and insurance companies.

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The function of UCR UFIRS as effective internal supervisory tool for evaluating the soundness of financial institutions on a uniform basis and for identifying those institutions requiring special attention or concern. Each financial institution is assigned a composite rating based on an evaluation and rating of six essential components of an institution's financial condition and operations: adequacy of capital, the quality of assets, the capability of management, the quality and level of earnings, the adequacy of liquidity, and the sensitivity to market risk.

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Consumer & Commercial Clients 62,2% of total C&CC loans outstanding by Netherlands. 32% North America. 2% Brazil. The relative increase by Netherlands mainly reflected the appreciation of the Euro agains US$ and Brazilian Real. Consumer business 59% of total C&CC private loans, commercial loans to middle-market companies 41%.

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Wholesale Clients Mostly located in developed country, Europe (49%) and North America (30%). Market conditions and exchange rate movements caused a noticeable shift of WCS total limits. Business Units clients: Financial Institution & Public Sector (63%) Country Coverage (13%) Integrated Energy (10%) Telecom, Media, Technology & Healthcare (9%) Consumer (5%)

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Provisioning Policy Provision : Set aside an amount in an organizations accounts for a known liability. Financial institution have to provision against loan losses. ABN AMRO had developed specific provisioning policies for its businesses. Credit officers continually monitored the quality of the bank's loan portfolios. Provisioning for consumer loans was made on a portfolio basis, with specific allowances maintained at a level commensurate with the portfolio size and loss experience.

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Consumer & Commercial Clients In 2002, weaker economic conditions in the Netherlands were reflected in somewhat higher provisions C&CC's total provision for 2002 was EUR 881 million, representing an increase of 10% over total provisions in 2001. Provisions moved from 51 bps of average RWA (Risk weighted assets) in 2001 to 58bps in 2002 Of the total provisions in 2002, 37% related to consumer loans and 63% to commercial loans.

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Difficult credit conditions continued in the US through 2002 and resulted in provision levels of 62 bps of average RWA. Most sectors, including the commercial and asset-based lending businesses were affected. In Brazil, provisions of EUR 193 million (unchanged from 2001) were mainly on account of consumer lending and charges related to discontinued (1999) USD car leasing portfolios. Provisions moved from 250 bps of average RWA to 265 bps in 2002.

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Credit protection measures instituted by local risk committees and GRM enabled ABN AMRO to weather the market volatility and economic turmoil in the region. ABN Amro believed that the quality of the local C&CC portfolio remained satisfactory.

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Wholesale Clients Provisions increased to EUR 742 million from EUR 543 million in 2001. Provisions were also adversely affected by corporate governance and disclosure malpractices, which led to unexpected and specific corporate failures, notably in the US

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Country Risk ABN Amro managed emerging market country risk, on a portfolio basis. ABN AMRO had been monitoring cross-border exposure for many years by using a VAR model to determine the cross-border risk on the total portfolio

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In absolute terms, cross-border exposure in 2002 fell by 4.3% compared with 2001. This decline was mostly due to lower exposure to Latin America, mainly Brazil and Argentina. At end of 2002, cross-border exposure to Brazil accounted for 18.1% of the total cross-border risk exposure. Of this amount, 76% was mitigated since it was trade-related or insured.

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Wholesale Clients Individual Industries clients: Utilities (3,8%) Telecom (3,3%) Manufacture (3,2%) Oil & gas (3,2%) All industry exposures were controlled under agreed caps and diversified across geographic markets.

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Market Risk Market risk is the uncertainty resulting from changes in market prices. Affected by other risks such as interest rate risk and FX risk It can be measured over periods as short as one day. Usually measured in terms of dollar exposure amount or as a relative amount against some benchmark.

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Market Risk Measurement Back Simulation Analytical Monte Carlo Stress Testing Back Testing

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ABN AMRO market risk principles Simple products, larger limits Complex products, lower limits Limits are an instrument of delegation; excesses are possible provided agreed up front Escalation of any excesses from RMC GRC ALCO

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ABN AMRO Market Risk Factors They measured and monitored: Interest rate sensitivity Open currency position Stock prices Spread sensitivities Greeks (delta, gamma, vega, rho)

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ABN AMRO Market Risk Factors They also make calculation on: Limitation for VAR Stress Test / Scenario analysis Position concentration Ageing Monitoring of market risks at different levels, start from single trading potfolio to key aggregation levels

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Back Testing Backtests: comparison of Profit & Loss versus Value at Risk Actual backtests Full back office P&L (incl. fees, commissions, intra-day trading) versus Value at Risk Hypothetical backtests P&L due to just market movement versus Value at Risk

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Back Testing VAR99 (expected that on one out of every 100 trading days a loss which exceeded the VAR might occur) The results of the back testing on the actual and the hypothetical P&L were regularly reported to the Dutch central bank The hypothetical back testing was also an essential instrument for validation of the bank's internal models The back-testing result showed that the hypothetical P&L exceeded the calculated VAR only on two days in 2002

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ABN AMRO: Value Risk versus Hypothetical Profit & Loss for Trading Portfolios for 2002(in million)

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Market Risk Model and Calculation Internal models Fulfill regulatory requirements Approved by the Dutch central bank for the calculation of solvency requirements for market risk ABN Amro used VAR as the primary tool for day-to-day monitoring of trading-related market risk Historical Simulation, based on four years of historical data One-day holding period Relative changes of historical rates and prices 99% confidence level and equally weighted simulations The VAR was reported daily to the senior management of the BUs, GRM and members of the Managing Board

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ABN AMRO: VAR for Trading Portfolios VaR for trading portfolios (99% confidence level, one-day holding period) (in million) 31/12 2002 Minimum Maximum Average Average in 2001 Financial Markets 16 13 51 27 33 Global Equity 7 4 15 8 10 Total trading 17 13 49 30 41

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Stress Tests and Scenario Analyses Stress Test: Internally developed To reflect specific characteristics of the bank's portfolios Scenario Analyses: Based on historical market events Black Monday (18 - 20 Oct. 87), Bond crash (18 - 21 Feb. 94), Emerging market crisis (24 - 28 Oct. 97), Financial market crisis (Jul. - Oct. 98), Czech scenario (May 97) Both are performed daily for each trading portfolio and at several aggregation levels, including the bank-wide total

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Asset & Liability Management

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Group Asset and Liability Management (GALM) Protect the earnings and capital position of the bank from adverse interest rate and currency movements and managed the bank's liquidity Group ALM responsibilities: Governance / policy setting Interest rate risk Liquidity risk Capital management Profit centre tasks Funding and capital management structure Currency risk hedging of capital Overlay portfolios for Group interest positions

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Group Asset Management and Liability Committee (Group ALCO) Members: Finance Treasury Risk management Had global responsibility across the SBUs It also monitored the activities of local ALCO in the bank's home markets ALCOs existed in other countries, but their interest risk came under the market risk management framework monitored by GRM

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ABN AMRO: Distribution of Daily Revenue for FM for 2002

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ABN AMRO: Distribution of Daily Revenue for GED for 2002 (in millions)

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Interest Rate Risk Group ALCO set limit to ensure that the potential adverse impact on trading and non-trading earnings, due to market movements, was well controlled. Scenario analysis were used to monitor and limit non-trading interest rate risk. Simulation models and estimation techniques were used to assess the sensitivity to movements in the shape and level of the yield curve. Client behavior also played an important role in interest rate risk calculation, such as mortgages.

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Currency Risk In trading portfolio, exposure to exchange rate movements were managed through market limits based on VAR. Short and long position were monitored to ensure compliance with GRCs limits. Use various hedge strategies to protect itself against the adverse effects of translating foreign currency into euro. Ratio hedge the Banks BIS-ratios were protected against fluctuations in the EUR / USD rate. Capital hedge when the expected currency loss was larger than the interest rate differential between the two currencies. Profit hedge to dampen the impact of currency movement on the P&L.

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Liquidity Risk Liquidity risk would arise if, for example, the bank was unable to fund its portfolio of assets at appropriate maturities and rates or was unable to liquidate a position in a timely manner at a reasonable price. ABN Amro managed liquidity on a daily basis, and Local line management was therefore responsible for managing local liquidity requirements under the supervision of Group ALCO. The bank had established group-wide contingency funding plans that anticipated changes in the bank's structural liquidity under different scenarios and set out damage-limitation procedures in case of crises. ABN Amro considered the impact of these potential changes on the bank's sources of short-term funding and its long-term liquidity planning horizons.

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Interest Rate Risk To mitigate the liquidity risk, the bank had a liquidity buffer consisting of unencumbered liquid assets, such as marketable securities and other short-term investments. The size of the liquidity buffer was linked to the outcomes of these stress tests. The ability to sell assets (apart from marketable securities) quickly was an additional source of liquidity for the bank. Diversity of funding products, market and maturity played an important role in funding decisions.

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Operational Risk ABN Amro defined operational risk as the risk of loss resulting from inadequate or failed internal processes, human behavior and systems or from external events. ABN Amro had established a dedicated Operational Risk Management (ORM) discipline in 2000 to manage operational risks, was similar to the credit and market risk function. The Group Operational Risk Committee was the highest approval authority for operational risk policy and consisted of members from GRM and the relevant business lines.

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Operational Risk Risk Self Assessment a structured approach, which assisted line management in identifying and assessing risks and to take corrective actions. Corporate Loss Database a database that allowed for the systematic registration of operational risk- related losses. Risk Approval Process A comprehensive approval process that included an explicit assessment of the operational, legal and reputational risks Key Risk Indicators Key risk indicators were used for trend analysis over time and to trigger off escalation procedures. Key Operational Risk Control improved risk awareness and provided inputs for Risk Self-Assessment.

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Thank You